MOODY'S ASSIGNS FIRST-TIME (P)Baa1 RATING TO ENERGY EAST CORPORATION'S SHELF REGISTRATION OF DEBT SECURITIES; ALSO UPGRADES CENTRAL MAINE POWER COMPANY'S CREDIT RATINGS (SR.UNSEC. TO A3)
Moody's Investors Service assigned a (P)Baa1 first-time rating to the $500 million S-3 shelf registration for prospective issuance of unsecured debt securities of Energy East Corporation. In conjunction with the assignment of Energy East's rating, Moody's is also upgrading the senior unsecured debt ratings of Central Maine Power Company (CMP) to A3 from Baa1.
The (P)Baa1 rating reflects Energy East's relatively low-risk business strategy, which primarily focuses on growing its regulated energy distribution operations, as well as the predictable and sustainable cash flows that will primarily take the form of upstreamed dividends from its regulated subsidiaries. The rating also takes into account Energy East's structurally subordinated access to its subsidiaries' cash flows, along with the risks present in what is expected to remain a relatively small portfolio of non-regulated business investments.
The upgrade of CMP's ratings primarily reflects the expected benefits that will result from its affiliation with a larger family of companies once Energy East completes the remainder of its pending acquisitions. Indeed, Moody's anticipates that CMP will benefit from merger-related cost savings, which will likely result in improving debt protection measurements.
CMP's ratings upgraded include its senior unsecured debt and issuer ratings to A3 from Baa1 and its preferred stock to "baa1" from "baa2". CMP's short-term credit rating for commercial paper is not affected by the upgrades and is confirmed at Prime-2. The outlook for all of CMP's ratings is stable.
A stable outlook is also assigned to Energy East's first-time (P)Baa1 rating, largely reflecting the stable rating outlooks for the company's currently rated utility subsidiaries, as well as for those companies that it expects to acquire in the near future.
Moody's notes that Energy East is transforming itself into a super-regional energy services and delivery company through four mergers that were announced during 1999. New York State Electric and Gas Corporation, or NYSEG (currently rated A3 for its senior secured debt), is expected to provide the majority of the consolidated cash flow to help service Energy East's fixed obligations. However, Energy East's February 2000 acquisition of unrated Connecticut Energy Corporation, which conducts gas distribution operations through its subsidiary Southern Connecticut Gas Company (currently rated A2 for its senior secured debt), introduced another source of regulated cash flow into the consolidated picture. Furthermore, the impending acquisitions of three other entities in the Northeast: unrated CMP Group, Inc. (the parent company of the electric utility, Central Maine Power Company, which is now rated A3 for its senior unsecured debt); unrated CTG Resources, Inc. (the parent company of the gas distribution utility, Connecticut Natural Gas Corporation, which is currently rated A3 for its senior unsecured debt); and unrated Berkshire Energy Resources (the parent company of the unrated gas distribution utility, Berkshire Gas Company), will add even more geographic and regulatory diversity to the company's consolidated revenue and cash flow streams. At the same time, these acquisitions will increase the size and scope of Energy East's operations, ultimately placing the company in a better competitive position in the changing electric and gas markets in the Northeast.
An important part of Moody's analysis of Energy East's credit risk profile involves a weighted average risk assessment of the prospective cash flow streams that each of the aforementioned utility companies will be providing to the parent company once all of the acquisitions are completed. In doing so, Moody's notes that all of the companies benefit from a generally supportive regulatory and legislative environment, which should enable them to substantially recover those remaining costs that might become stranded due to competition in the electric and gas markets, as well as help them maintain their respectively sound credit profiles. The sound credit profiles are currently based in part on the significant amounts of cash on hand from the sale of non-nuclear generation assets by NYSEG and CMP, which will be used to help fund the cash portion of the impending acquisitions. The use of the cash for this purpose helps limit the acquisition-related debt financing to the $500 million available under Energy East's shelf registration. Over the intermediate term, Moody's expects that NYSEG and CMP will also divest their nuclear assets, which will further improve their respective business risk profiles. We also expect that NYSEG will take steps to return its balance sheet to previous levels of debt and common equity.
Overall, the utility company credit profiles are characterized by flexible balance sheets and solid, predictable cash flow coverage of interest expense ratios that compare favorably to similarly rated peers. The utility companies should also benefit in the future from good opportunities to penetrate natural gas distribution markets, especially in Connecticut and Maine, and from anticipated costs savings, which together are expected to approximate 5%-7% of non-fuel operating and maintenance expenses once the merger synergies take full effect. At the same time, as Moody's analyzes Energy East on a standalone basis, we anticipate that adequate free cash flow will be available to comfortably protect Energy East's own fixed income investors, while also meeting anticipated dividend payments to its common shareholders.
As management considers growth opportunities in the future, fixed income investors at any of the utility company levels should be wary that a portion of that growth could come from Energy East's additional investments in non-regulated businesses, which carry higher business risks than regulated operations. This risk should not, however, cause undue credit concerns because of the holding company structure that exists, as well as management's historically prudent approach to such investments. It is also important to note that management is likely to use excess cash to continue buying back Energy East common stock to enhance returns for the company's shareholders, while maintaining a minimum target consolidated common equity ratio of about 40%.
Going forward, we expect that management will consider additional acquisition opportunities that arise, provided they are consistent with its plans to expand its energy distribution operations. Any significant divergence from the conservative approach taken with respect to the aforementioned acquisitions to date could add pressure to Energy East's ratings, as well as those of its subsidiaries. In the meantime, prospects for improvement in Energy East's credit quality will hinge importantly on the ability of its operating subsidiaries to improve their respective credit profiles. This is especially important as relates to NYSEG since, absent another significant acquisition, it should continue to contribute a majority of the cash flow to be upstreamed to its parent over the foreseeable future. Key prospective issues that are likely to have a bearing on NYSEG's future credit quality are the extent to which it can be successful in dealing with the risks tied to its role as provider of last resort for customers who do not choose an alternative power supplier, strengthening its balance sheet, and coordinating with its affiliated utility companies to reap maximum synergy savings for its parent company. Finally, Moody's will closely follow the ongoing efforts by Energy East's regulated utilities to establish multi-year performance-based regulatory plans, which would help clarify the extent to which merger-related synergies can be retained.
Energy East Corporation is a super-regional energy services and distribution company, with headquarters in Albany, New York, Stamford, Connecticut, and Portland, Maine.
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